Baird: Industrial M&A to Continue in 2014, But Questions on Timing and Magnitude of Growth

Baird, an employee-owned international financial services firm, will host its 43rd annual Industrial Conference in Chicago, Nov. 4-6. The conference will bring together institutional and private equity investor attendees to hear presentations from nearly 140 leading public and private Industrial companies. For more information on the conference follow @BairdConference, #RWBIndustrial.

As a preview to the conference, Baird spoke with Industrial Senior Research Analyst Mircea (Mig) Dobre, CFA, about the significant global M&A activity happening in the Industrial sector and whether that’s likely to continue in 2014.

Q&A with Senior Research Analyst Mig Dobre, CFA

Will this Industrial M&A activity continue into 2014?More than likely. High cash balances and healthy balance sheets, when combined with a growth environment, serve as catalysts for continued M&A activity. But, I think it’s important to recognize that increased competition – primarily coming from financial buyers – has resulted in deal multiples often outside the optimal range of strategic buyers. As a result we are seeing more companies in our coverage universe taking a hard look at their existing portfolios, seeking to realize value by divesting non-core or lower growth businesses, reduce costs and return cash to shareholders through both dividends and share buybacks. Recent examples include Illinois Tool Works, Inc. (ITW), which announced plans to sell the Industrial Packaging segment, and Dover Corporation (DOV), which spun off certain Communication Technologies assets Knowles and Sound Solutions.

What geographies are particularly attractive to Industrials for M&A? How important are more established versus emerging markets?Emerging markets have been and will continue to be attractive given term demand, as well as supply chain dynamics pertaining to content localization. But 2014 could also bring increased activity in Europe as the macroeconomic signs suggest more stabilization. It’s also important to remember that a significant percentage of Industrial companies’ cash balances are held outside of the U.S., making potential overseas acquisitions more attractive in the near term.

What could cause a pullback in this type of M&A activity? How much of a factor do issues such as rising interest rates, European debt issues and continued turmoil in Washington affect this activity?High levels of uncertainty surrounding growth, as well as government policies – both in the U.S. and abroad – are perhaps the biggest obstacles to overcome. We often hear of potential transactions failing due to a disconnect between buyer and seller expectations, particularly with regard to the GDP or industry growth assumptions baked into a transaction’s financial forecasts.

What are some of the key topics concerning Industrial companies that institutional investors are focused on?Organic growth is the topic likely to garner most attention. Over the past couple of months, leading indicators such as the Purchasing Managers’ Index (PMI) and an uptick in global macroeconomic data suggest improvement in Industrial activity in the U.S. and abroad. While this data is encouraging and has certainly contributed to strong stock performance across much of the industrial space, investors will need to understand the timing and magnitude of improved growth. The Baird conference is an ideal forum to help investors get this needed perspective given the broad spectrum of industrial companies presenting, as well as the timing of the event, which follows third quarter earnings and is when many companies are in the process of finalizing their 2014 outlooks.

An investment should not be made on this content, as this is not a complete analysis of every material fact regarding any company, industry or security. Please click here for a complete list of the companies Baird covers.

About Mig Dobre, CFAMig Dobre is Baird’s senior analyst covering Diversified Industrial & Machinery team. Prior to joining Baird’s equity research department in 2009, he was a senior investment consultant at Baird for seven years and was a consultant at Deloitte & Touche. Mig received a BS in Finance from Ferris State University and an MBA with concentrations in Finance and Accounting from the University of Chicago.

About Baird ResearchBaird’s Equity Research Department consists of over 120 research professionals covering approximately 700 companies. Baird analysts have been recognized repeatedly in The Wall Street Journal’s annual “Best on the Street” survey and in StarMine’s annual top analyst rankings. In 2013, Baird was awarded a No. 1 ranking by Greenwich Associates for U.S. Small- and Mid-Cap Equities for Most Trusted Research for the tenth consecutive year. The May 2013 Greenwich Associates U.S. Equity Investors-Small/Mid-Cap Funds survey was conducted with 88 U.S. small-cap and mid-cap fund managers.

About BairdBaird is an employee-owned, international wealth management, capital markets, private equity and asset management firm with offices in the United States, Europe and Asia. Established in 1919, Baird has approximately 2,800 associates serving the needs of individual, corporate, institutional and municipal clients. Baird has more than $100 billion in client assets. Committed to being a great place to work, Baird ranked No. 14 on FORTUNE’s 100 Best Companies to Work For in 2013 – its tenth consecutive year on the list. Baird’s principal operating subsidiaries are Robert W. Baird & Co. in the United States and Robert W. Baird Group Ltd. in Europe. Baird also has an operating subsidiary in Asia supporting Baird’s investment banking and private equity operations. For more information, please visit Baird’s Web site at rwbaird.com.

Baird Industrial Sector, Conference Preview

As a preview to the conference, Senior Research Analyst Mircea (Mig) Dobre, CFA discusses some of the sector dynamics, including M&A and organic growth.